A callable bond with a make whole provision has a par value of $1,000. It has a coupon of 7%, a yield to maturity of 6% and matures in 8 years. If a comparable Canadian treasury note has a yield of 5% and the make-whole call provision provides for a 50 basis point call premium above the comparable treasury note, what is this bond's make whole call price? Assume semi-annual payments.

Question

Quizplus · Accepted Answer

The make-whole call price is calculated by discounting the bond's remaining cash flows at the make-whole call rate, which is the sum of the comparable treasury yield and the call premium. In this case, the make-whole call rate is 5% + 0.50% = 5.5%. The bond's remaining cash flows include the semi-annual coupon payments of $35 (7% of $1,000 divided by 2) and the par value of $1,000 at maturity. Discounting these cash flows at the semi-annual make-whole call rate of 2.75% (5.5% divided by 2) for the remaining 16 periods (8 years * 2) gives the make-whole call price, which is approximately $1,096.03.

A Callable Bond with a Make Whole Provision Has a Par